BALANCED SCORECARDS

Part I: Establishing Balanced Scorecards

Released April 2001

Organizations tend to juggle a number of improvement initiatives at the same time, ranging from
process mapping to benchmarking to administering customer satisfaction surveys. But they
often lack the alignment to cohesively structure these initiatives in a way that addresses an
overall strategy.

The balanced scorecard, a framework that links business strategies with day-to-day activities, is
one solution that has worked wonders for many.

"If profits go down, you don't know what's driving profits," said Cynthia Raybourn, an APQC
custom engagement specialist. "Measurement is a whole lot more than a yard stick. It doesn't
just measure where we are but helps us get to where we want to be. The balanced scorecard is
a means of focusing people's attention on desired behaviors and desired results."

A balanced scorecard aligns measures with strategies in order to track progress, reinforce
accountability, and prioritize improvement opportunities. Unlike a bottom-line analysis, a
balanced scorecard integrates four related perspectives: finance, customers, internal processes,
and innovation and learning. "Essentially, it's a means of understanding—in an accurate and
complete way—the overall performance of an organization," said Raybourn.

Raybourn explained that the balanced scorecard is the most popular and widespread framework
for developing performance measures. Even so, implementation has proven to be a challenge in
most organizations. Part of this difficulty is the scorecard's reliance on fully articulated strategic
objectives. Successful implementation breaks down if an organization lacks direction.
Furthermore, identifying critical success factors is an involved process. And changing
measurements from an emphasis on finance to a more balanced approach with multiple
emphases has significant cultural implications, ranging from changes in compensation and
career advancement to increased dependence on teamwork. So, like any other culture change
initiative, the balanced scorecard process carries a set of challenges to successful
implementation.

The good news is these challenges can be overcome with a detailed balanced scorecard
implementation process. The following is a basic framework upon which an organization can
formulate links between its business strategy and day-to-day activities.

Step 1: Plan the Project

This step is critical to the success of the implementation process. The following activities should
be considered by the process sponsor and owners.

• Confirm the scope of the project and establish a project time line. "A clear sense of
the mission, values, and strategic objectives is the single, most critical thing to
establish," said Raybourn. Once this has been done, the sponsors and owners
determine the scope of the project, which will likely begin with a small number of teams
or departments.

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 The project time line should allow for sufficient refining of the project, as well as initial
resistance from cultures unfamiliar with performance measures. "People may be
resistant to judging performance. It can lead to one of the more emotional discussions
around process improvement," said Raybourn.

• Outline a project communication approach. "We really try to gear it so that everybody
understands what this thing is and what they will walk away with," said Gretchen
Gemeinhardt, an APQC project manager. "The people who do the work understand what
customers expect. Rather than have senior management talk about what people do, the
people who do the work design the balanced scorecard because they know best how the
process works."

As a result of intensive employee involvement, employees gain a sense of ownership,

instead of considering performance measurement an imposition. The implementation
process must communicate with those not entirely involved.

• Determine organizational participation and roles. Raybourn and Gemeinhardt

recommend using team members with a solid understanding of the processes that will
be measured to ensure alignment between processes and measures as well as to build
buy-in for the effort.
• Confirm expected project deliverables. Defining project deliverables will create
support by revealing a long-term commitment, as well as long-term benefits. "If it's
introduced as yet another initiative, it becomes just another fad of the week. And
employees feel that if they wait long enough, it will go away," Gemeinhardt said.

According to Raybourn, in the beginning, it is important to set the stage and ensure that
measurement helps you do your job better and enables your group to meet its goals—
rather than punishing you "every time a number goes down."

Step 2: Design the Scorecard

This step involves creating the balanced scorecard and developing an implementation plan.
Teams need to be coached through the design process to support their strategic direction.

• Design a balanced scorecard, with focus on specific measures that support

business strategy. Emphasize practical measures that can be tracked. "You have to be
incredibly detailed about measures," said Raybourn. "We're looking for those vital few
things that matter the most. Somewhere between five and nine measures is ideal—not
127. And then we have to start thinking about where to get the data. And where are we
now? So how will we know if we are improving?"
• Identify critical success factors for implementation. Rather than plug measures in
from a financial perspective, teams should consider the aforementioned four
perspectives (finance, customers, internal processes, and innovation and learning) and
assess the critical success factors of each point.

Team members should assess the few things they do exceptionally well and then decide
how to measure those success factors. "It's something that typically takes several days.
And it's something that's rarely done on the first try," said Raybourn.

• Develop an action plan to support implementation. "Measures are only useful if they
are collected and reported to the people who can influence them on a very regular

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 basis," said Raybourn. "Measures aren't the end; it's really the improvement that's the
end. Measures will never give you all the answers, but they can tell you what questions
need to be asked and what kind of opportunities exist. And then you have to go into the
process improvement activities to get the results."
• Collect and prepare data. Raybourn said, "Take a look at the group that you're
responsible for and ask, 'How do we contribute to the organization's strategic
objectives?' Then, identify your customer and what they want. What is the process to
satisfy customer wants? What kind of input to the process do you need? And who
supplies that?" Then the team establishes a methodology that includes data collection
and validation.
• Track measures. Within their daily operations, team members will collect data, reveal
unanticipated hurdles, and take action to overcome them. After many intervals, the
teams will begin to identify trends.

"What's appealing to a lot of organizations is that once it's all said and done, it's
relatively simple to use," said Gemeinhardt. "We're not talking about a cumbersome,
additional process. This blends into daily activities and becomes part of standard
operations, driving strategic performance.

Step 3: Employ and Refine Measures

This step will take between four months and a year to complete, depending on the selected
measures and the necessary revisions.

• Employ scorecards. Practical application requires time to establish an infrastructure

and collect data over several cycles. The cycles must be frequent. "So what we're
looking at is measures of feedback on how you're performing, sooner—weekly or
monthly. When it gets to the end of the year, you don't want to be surprised," said
Gemeinhardt.
• Monitor performance gaps. The measures themselves won't explain performance
gaps, but they will point clearly to a real problem.
• Refine measures of the scorecard. "At some point, you say, 'This scorecard is right.
This is going to give us what we need for the next year,'" Raybourn said. "Down the
road—if your process changes dramatically, if the market changes, or if the strategic
direction of the organization changes—you'll have to revisit it."
• Identify implementation issues. Top-level management should ensure that the
scorecard guides the entire organization in its chosen direction. There must be a sense
of urgency and a convincing argument that the proposed solution will mitigate wasteful,
whimsical changes.

Applications

The balanced scorecard can be implemented across an organization. It also can measure the
performance of a small team or department, and it can exist at multiple levels within an
organization. Raybourn and Gemeinhardt recommend gradually implementing it within every
division, department, and process.

"It can start at the top and cascade down, or it can start at another level and bubble back up,"
said Raybourn. "Ideally, it should start at the top and cascade down so people have direction
and understanding about the total organization's mission and vision."

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Part II: The Balanced Scorecard & Performance Improvement:

Using the balanced scorecard to combine viewpoints of company success

Oftentimes we have heard the expression, "what gets measured, gets improved." Unfortunately,
just saying this begs the question about what we should measure, how we should measure it,
and what should we change to make those measures improve?

Problems with just one measure of success

If you were to ask most anyone how they would measure company performance, they might
give you a funny look and say, "How much money the company makes, of course! Isn't that
obvious?" To a certain extent, they are right. Profitability, gross revenues, return on capital, etc.
are the critical, "bottom line" kind of results that companies must deliver to survive.
Unfortunately, if senior management only focuses on the financial health of the organization,
several unfortunate consequences arise. One of these is that financial measures are "lagging
indicators" of success. This means that how high or low these numbers go depends on a wide
variety of events (talked about later) that may have happened months or years before and that
you have no immediate control of in the present. Being in a plane falling from the sky is a bad
time to realize that you should have done routine maintenance, and oh, by the way, filled it with
gasoline!

Another of the consequences of just focusing on financial measures is that they have nothing to
do directly with the customers who use your organization's product or service. Decisions may be
made that help your organization financially, but hurt the long-term relationships with one's
customers, who may eventually reduce the purchases or leave you altogether. We all may have
been in the spot of paying for car repairs that we need, but we know that we are paying too
much and will never go back to that service station again.

Instead of such a short-sighted, after-the-fact view of company performance, we need a more

comprehensive view with an equal emphasis on outcome measures(the financial measures or
lagging indicators), measures that will tell us how well the company is doing now (current
indicators) and measures of how it might do in the future (leading indicators)

What is the balanced scorecard?

The balanced scorecard is just remedy for this kind of problem. First of all, the balanced
scorecard is a way of:

· measuring organizational, business unit or department success

· balancing long-term and short-term actions

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· balancing different measures of success

o Financial
o Customer
o Internal Operations
o Human Resource Systems & Development (learning and growth)

· A way of tying strategy to measures to action

Four Kinds of Measures

Under the balanced scorecard system, financial measures are the outcome, but do not give a
good indication of what is or will be going on in the organization. Measures of customer
satisfaction, growth and retention is the current indicator of company performance, and internal
operations(efficiency, speed, reducing non-value added work, minimizing quality problems) and
human resource systems and development are leading indicators of company performance.

Context and Strategy

Just as financial measures have to be put in context, so does measurement itself. Without a tie
to a company strategy, more importantly, as the measure of company strategy, the balanced
scorecard (or BSC) is useless. A mission, strategy and objectives must be defined, measures of
that strategy (the BSC) must be agreed to and actions need to be performed for a measurement
system to be fully effective. Otherwise, to use an American expression, the company is all
dressed up but nowhere to go.

Finding the causes(drivers) of success

Once the company mission, strategy and measures have been defined and agreed upon, the
next step is to understand fully the drivers(causes) behind movement (up and down) of your
balanced scorecard. Without the specific knowledge of what drivers will affect your scorecard,
your organization just might spend much time, money and effort and achieve very little.

These drivers fall into four categories:

· Environmental - those factors outside the influence of your organization, such as governmental
regulations, the economic cycle, local, national and global politics, etc.

· Organizational - systems inside the organization such as company strategy, human resource
systems, policies, procedures, organizational structure, pay, etc.

· Group or departmental - work processes, group relationships, work responsibilities, work

assignments

· Individual - personality, management style, skills, behaviors.

A good method of outlining the causes and effects among these drivers is a flowchart or affinity
diagram.

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Creating SMART targets

After a full understanding the relationships among the drivers and between the drivers and
measures is reached, the next step is to create a SMART target or objective. A SMART target
is:

· Specific

· Measurable

· Agreed upon

· Realistic &

· Time-bound

In reality, though, a SMART target is not enough. A SMART project must be created as shown
in the following example describing not only the target, but the methods, timetables and
resources needed to accomplish the task:

· We will reduce the current cost-per-barrel by 20% by the end of April 2002 by:

o Adding a 10% bonus to all employees salaries for every 10% drop of the cost-per-barrel
o Moving to a completely asset- or area-based organizational structure
o Creating a team to eliminate non-value-added steps from the administrative and operations
functions, so that only critically essential functions are kept.

· The implementation plans for these steps are attached, including personnel assignments,
workloads, budget assignments, sequence of implementation, etc.

Keys to Creating SMART projects and Implementing the BSC

The equation

I look at the successful implementation of the BSC as an equation:

Success = Measurement X Technique X Control X Focused Persistence X Consensus

Measurement

First of all, success is a function of what Measures you use. If you don't measure the right things
and the measures don't reflect what is really going on, much will be done in an organization, but
little will be accomplished.

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Techniques

Second, what Techniques or methods also have a significant bearing on success. Techniques
fall into two categories:

· Large-scale, or major techniques

o Examples include restructuring, tying pay to measurements, putting added resources ($ and
people), adding or changing customers or products, re-engineering processes, change of
strategy, addition or change of core competencies, etc.

· Small-scale, or minor techniques result in small changes in drivers

o Motivational speeches, problem-solving teams focused on technical issues, displaying graphs

to employees on bulletin boards, etc.

The key to using these techniques is to realize that if major improvements in BSC measures are
needed, then large-scale change techniques must be used. This facts usually causes great
distress in the organization, because many think major improvements can be made only by
tinkering with the organization, rather than making fundamental change. If management is
willing only to use small-scale techniques, then they must expect only modest improvements in
BSC measures.

Control

Another part of the equation is control. Once management has brainstormed a list of possible
actions that might accomplish its SMART target, these actions need to be categorized into four
levels:

· Level 1 action: in control of action and effects are inside your organization

· level 2: action: in control of action, but effects are outside your organization

· level 3 action: not in control of action, but it affects your driver

· level 4 action: not in control of action, but does not affect your driver

For management to be successful, they must

· Concentrate on level 1 & 2 actions

· Gain control of, or compensate for, level 3 actions

· And if they do not have sufficient control over the actions necessary to achieve their SMART
target, then they must lower their expectations on what they can accomplish and either set a
lower target, or abandon the target altogether. Otherwise, it just isn't SMART!

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Focused Persistence

Focused persistence, otherwise known as project management, is another key in the equation.
Project management includes having a timetable(beginning and end) for each task, periodic
reviews of accomplishments, resources and people assigned to each task and most importantly,
a sincere drive to accomplish the tasks. Use of such tools as Gantt charts, PERT charts, etc.
are essential tools in this process.

Consensus

The last, but just as critical factor is consensus. The best laid plans, with a thorough knowledge
of measures, drivers, and with sufficient resources will fail if there is not agreement enough
among those with sufficient power to block BSC implementation. Key power brokers need to be
involved in decision-making, and as many others as possible in the various stages and steps
outlined here. Among some opportunities for involvement include:

· Communicate with them on the importance and status of the project

· As part of planning and decision-making

· Implementation of action

· Suggestions for improvement

In conclusion

Keeping in mind these factors when implementing the BSC will substantially increase your
chances of success. Though every factor in the equation above does not have to be perfect,
and can compensate for one another, all must be present to some extent for BSC to be
implemented.

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